Question: Suppose I get a property under contract for $200,000 from a motivated seller who is going through a divorce and needs to sell. I have the property inspected and appraised. It appraises for $240,000. I place an ad in the paper saying "Beautiful home -- $20,000 cash back at closing." A buyer agrees to this and purchases the home for $240,000. I write him a check for $20,000 at closing.
Is the above scenario okay? What if an addendum were written stating that I would pay the buyer $20,000 right after the property closes, rather than at the closing? What if I were to write an addendum stating that I would buy a stick of bubble gum for $20,000 five minutes after closing?
Just a thought.
Answer: Let's sort through what you're suggesting.
You buy a property and are able to quickly re-sell or assign it at a higher price. Fine.
You buy a property and sell or assign it with what's called a "seller contribution" which you disclose in writing to the lender. Because of the seller contribution, the buyer actually gets cash back at closing. Fine.
However, your particular scenario breaks down in several places.
First, when YOU "have the property inspected and appraised" lenders could care less. They have their own appraisers and loan decisions are made on the basis what their approved appraisers determine.
Second, lenders underwrite loans on the basis of the appraised value or the sale value -- whichever is less. It's unlikely that a lender's appraiser would view your property as being worth anything more than $200,000 given that no material change in the property or the marketplace occurred.
Third, you can provide a credit to the buyer -- as long as it's shown to the lender. In effect, the $20,000 cash payment is a sale price discount, something which must be disclosed to prevent over-lending. Given the discount, the buyer did not pay $240,000 for the property.
Fourth, many loan programs are simply unavailable for quick re-sales. As an example, FHA financing may not be used if a home has been re-sold by a private party within 90 days.
Fifth, many loan programs limit seller contributions to 3 percent of the sale price. Your contribution would not pass muster.
Sixth, if you bought the property for $200,000, sold for $240,000 and gave the buyer a $20,000 credit you would likely lose money. Why? Because you would have settlement costs to buy and more settlement costs to close.
Seventh, how does a buyer know that he or she will get $20,000 from you after closing unless the arrangement is in writing? Since the $20,000 is plainly tied to the sale of the property -- you wouldn't give $20,000 to just anyone -- it must be shown in the loan application as part of the sale agreement.
Eighth, the $20,000 price of that bubble gum is a fiction. Such value exists only for someone purchasing the property and not anyone else. Whether it's also evidence of mortgage fraud is something to discuss with an attorney.
Question: I'm currently in the process of investing in real estate with the intention of renting out a single family home. At this point I'm looking at investing 150K to 160K. The idea is to have no mortgage with monthly positive cash flow. My concern is where to invest. I've considered money market as well. Please help.
Answer: If your question is whether real estate is a better investment than money market funds, you need to know two things:
First, which real estate -- and which mutual fund? Since you're not buying all real estate or all mutual funds, you have to look at the specific investment where you expect to put your money. The returns from given properties, and given mutual funds, vary.
Second, know one knows what will happen in the future. The reason there's a marketplace is because some people think it's the time to buy while others think now is the time to sell.
In other words, all forms of investment represent risk and no form of investment provides an assured profit. Example: A bond pays 5 percent. That's a "guaranteed" return. But if inflation rises to 6 percent the bond owner has a real loss of buying power.
Question: I'm an attorney interested in changing my career path with the ultimate goal of being a real estate developer/entrepreneur. What advice do you have for me as to the best way to achieve that goal?
Answer: As an attorney you have a significant marketplace advantage in that you understand legal writing and are licensed to provide legal advice. Why not start as an associate broker (most states allow attorneys to acquire a broker's license with little trouble), learn the real estate business and the local market and then you'll be in a position to enter the development field. As a broker you'll also meet lots of potential buyers, investors and developers -- folks you need to know.
Question: I have real estate investments and enjoyed the tax benefits from them. I got married last year and this year had to file my first joint tax return, which made our household income over $150,000 (the point at which our accountant and the government said we are "rich"). Because we're over this amount, our accountant said we were not allowed to write off any of our four real estate properties. We showed all of our expenses on our tax forms, but the accountant said we wouldn't be able to recognize any of the expenses until we sell the property, at which time it would affect the basis of the homes.
I have always read how real estate is such a great tax shelter for the "wealthy," I was shocked that we weren't able to take advantage of this shelter. Does this sound in line to you?
Thank you,
Happily Married, Unhappily Deductionless
Answer: The government never said you were rich -- only that certain deductions phase out as income rises.
What sounds right is that you cannot apply certain investment real estate losses to non-real estate income once you have a gross adjusted income of $150,000 or more. However, you can shelter real estate income -- lots of real estate income. For details, speak with a CPA, enrolled agent or tax attorney. Also, see IRS Publication 946 , How To Depreciate Property and Publication 527, Residential Rental Property.
Question: I refinanced my condo last month and was planning to live there for a long time but due to family problems now I need to relocate. What are going to be the consequences apart from loosing the money that I paid for the settlement? Taxes? Penalties?
Answer: You may need to relocate but that does that mean you need to sell? Would it make any sense to rent?
If you elect to rent the lender may wonder if you sought residential financing for a property you intended to use for investment purposes. This could result in the lender calling the loan. Be sure you can document the family event that is causing you to move -- just in case the lender asks.
If you're going to sell, then you have to ask if you lived in the condo for two of the past five years? If so, you may be able to avoid substantial capital gains taxes. If you lived there less than two years, then see if any safe harbor exceptions to the two-year standard might apply. Speak with a tax pro for details.
Question: I listed my home at a price of $475,000. I also have a neighbor/friend who has been trying to purchase her own home by saving up for a down payment. If I were to receive offers from MLS selling agents for $450,000 -- $460,000, but I'd willingly sell to my neighbor for $415,000, because I know her financial situation and I want to help her out, would that be okay? Unethical?
Answer: Listing agreements typically say that owners are offering the property at a given price but have the option to accept less.
However, you do need to use caution here. For instance, if a broker brings in a buyer who meets all listing terms then you would owe a commission.
If you want to sell to your neighbor, speak with your broker and explain the situation. You want to act before an offer meeting your listing terms is made. The broker can still help your neighbor find financing, arrange for inspections and complete the tasks required for closing.
Question: If a buyer signed an offer with an housing inspection as a condition, and the buyer conducted the inspection himself and decided to break the offer, does the seller have the right to see the inspection report before signing the release?
Answer: What inspection report? Why would buyers write inspection reports for themselves?
What does the contract language say about an inspection? There are all kinds of alternative inspection arrangements which can be found in sale agreements. Determining what either party must do depends on what the agreement actually says.
Question: We purchased a townhouse for $272,500 (Canadian) including all costs. A real estate agent came and inspected the house and said he would be able to sell it at $299,000. Once we signed the agreement he started sending all kinds of articles and forcing us to bring the price down. Finally we brought the price down to $294,500, but were not too happy about that since we been paying the mortgage for more than 18 months.
Ultimately, we decided not to sell the house. The broker then sent us mail telling we were not interested in selling our house; that we were only trying to check the market value for our property; that we had wasted his time and money and we have to pay him $1,500 dollars within one month from the date of receipt. Must we pay?
Answer: In a typical situation when a broker lists a home the costs of advertising and other expenses are his to bear in exchange for the right to offer the property for sale and the opportunity to collect a commission.
Did you seek an early end the listing? If yes, then the broker has not had the full benefit of the listing period to sell the house and may well be entitled to compensation.
As to the price of the property, markets evolve. It may be that after testing the market at one price it became obvious that the property could not be sold at that value. At that point the next step is to find a value that would work.
If you did not terminate the listing early, then it's difficult to see a basis of the broker's claim. For details, speak with a local attorney. Also, Canadian real estate regulators might want to know more. A list of such regulators can be found at ARELLO.com .
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